Recently the markets appear to have settled somewhat and the Australian stock market has steadily been heading higher so far in 2012. Could we be seeing the early signs of another bull market taking hold or are we about to see another sharp correction take the ASX All Ordinaries back down towards 4000 and perhaps lower?
Over the last three months Australian stocks have been on quite a ride. In November and December 2011 we saw stocks rally strongly towards 4400 only to fall back quickly towards 4000. This movement can been seen on the candlestick chart below.
ASX All Ordinaries 3 Month Candlestick Chart
At present the All Ords appears to be trending upwards however the Chinese New Year holiday period has probably quietened things down a little so we are perhaps in a period of calm before the storm.
Then again maybe the U.S. economy is really on the mend and Australian stocks are on the verge of a long term upwards trend? A few more interest rate cuts by the RBA may weaken the Australian dollar enough to attract foreign money back into our stock market and entice people to move money out of cash (and gold) into stocks.
The U.S. S&P 500 Index has started the year strongly and outperformed the All Ords by quite a margin as Australian stocks don’t seem to be getting the lift from the U.S. stock market as they once did. This is probably due to continuing debt crisis in Europe and its possible impact on the Chinese economy.
ASX All Ordinaries versus S&P 500 Index 1 Year Chart
Recently (and as I predicted) the IMF (International Monetary Fund) has been cutting its growth forecasts for the global economy and on 24th January issued a statement in which it said it expected advanced economies to grow by just 1.2% during 2012-2013.
In Asia the IMF expects growth to be more robust at 5.75% and in China growth in 2012 is expected to be 8.2% which I expect will be downgraded later this year closer to 7.0%.
The IMF forecasts highlight that 2012 is likely to be a year where global economic growth slows and so this will keep commodity prices subdued. Therefore I don’t expect a wide rally across stocks in the mining sector this year.
Another worrying sign is that the Baltic Dry Index has continued to fall is is now not far above the low it reached during the height of the Global Financial Crisis (GFC) in late 2008. Shipping companies are hurting and not even slow steaming or a large number of laid-up ships appear to be pushing up shipping rates at the moment.
So although the U.S. economy might be showing some signs of recovery this is unlikely to give our stock market much of a boost as slowing demand from Asia and faltering economies across Europe will in effect, drag Australian shares in the other direction.
At this stage my crystal ball gazing leads me to believe that there will be another major move downwards before the market will set itself up for a serious run past 4400 and up towards 5000.
Now for a few more charts worth having a look at. Firstly let’s have a look at BHP Billiton versus the AMEX Oil & Gas Index.
BHP Billiton (BHP) and AMEX Oil & Gas Index (XOI) 10 Year Chart
What I find interesting about this chart is how the relationship between the BHP share price and the AMEX Oil & Gas Index broke down during the GFC in 2008 but now appears to be slowly coming back into some sort of alignment. Rightly or wrongly I see this as a indication that the markets might be able to sort themselves out this year.
If the BHP share price and AMEX Oil & Gas Index fell back to 2005-2006 levels then I would see this as a very positive indicator.
Another useful chart to look at is the long term chart of the ASX All Ordinaries Index.
ASX All Ordinaries Index: 1988 t0 2012
On the chart above I have drawn a couple of approximate long term trend lines which suggest to me that the Australian stock market is trading in a range which is basically aligned to the trend over the last 20 years. The sharp rally up from 4000 to nearly 7000 between 2003-2007 was too good to be true and the stock market is now basically back down to where it should be.
My personal view is that the top trend line is closer to where the market should be so that is why I have been expecting the All Ords & S&P/ASX 200 to get back up to the 4800-5200 range for quite a while. But the lower trend line would indicate that even now the All Ords is above the long term trend and that we shouldn’t expect our stocks portfolio to do much this year.
So in summary view at the moment is that although we are likely to see a major sell-off soon, that by the end of the year we should see the Australian stock market trading around the long term trend and hopefully at the higher end of that range.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp